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Better Buy: Netflix, Inc. vs. Facebook Inc.

Which of these internet behemoths should investors choose?

The average Netflix subscriber spends more time on Netflix than on Facebook, but which stock should you buy? Image source: Netflix.

If you don't spend a good amount of time browsing your Facebook(NASDAQ:FB) News Feed or binge-watching Netflix(NASDAQ:NFLX), you are a unicorn. As of the end of the second quarter, Facebook had 1.71 billion monthly active users, 226 million of whom reside in the U.S. or Canada. Netflix has 83 million total streaming subscribers, and 47 million in the United States.

These two internet giants dominate time spent online. The average Netflix subscriber spends 1.8 hours per day watching series and movies on the streaming service, according to one estimate. The average Facebook user spends over 50 minutes per day between Facebook, Instagram, and Messenger, according to Facebook.

Both companies have a product that its users can't get enough of, and they both continue to add new users every quarter. But if investors can choose only one stock -- Facebook or Netflix -- which should it be? Investors looking to make the decision should look to how the companies have grown in the past and what future growth is shaping up to look like.

All about growth

Revenue at Netflix accelerated during each of the first two quarters of 2016, up 0.5 percentage points in the first quarter and 5.3 percentage points in the second quarter.

One of the driving factors behind its revenue growth acceleration is its decision to increase its pricing in the United States. Longtime subscribers saw their rates increase $2 per month, about 25%, in May. More subscribers will see an increase of $1 per month in November.

The price increase caused a slight increase in churn during the second quarter, leading to a bad miss for Netflix on its subscriber addition estimates. The streaming service added just 160,000 domestic subscribers last quarter, falling short of its previous forecast of 500,000 net adds. International subscribers exhibited similar behavior, as some subscribers in older international markets such as Canada saw their price increase as well. Netflix added 1.52 million customers internationally, short of the 2 million it originally expected.

If Netflix revenue growth accelerated, Facebook's revenue growth shifted into warp speed. The social network's revenue grew 51.9% and 59.2% in the first and second quarters, respectively. That's an increase from 41.6% and 38.9% for the same quarters the previous year.

Facebook opened up advertising on Instagram to everyone in the third quarter last year, and that's helped fuel revenue growth along with increased advertiser demand on its flagship platform. Facebook is also seeing some growth come from its ad network, the Facebook Audience Platform.

While user growth at Netflix is slowing, Facebook has managed to accelerate its user growth. Monthly users increased 14.9% last quarter, compared with 13.1% in the year-ago period. That's quite a feat, considering Facebook now counts 1.71 billion monthly active users. Importantly, daily active users as a percentage of monthly users continued to increase, indicating improved engagement levels among Facebook users. As mentioned, the average user spends 50 minutes per day across Facebook's various properties.

Can they keep this up?

While the growth of both Facebook and Netflix has been impressive, prospective investors want to know if that growth can continue. Facebook CFO Dave Wehner warned investors on the company's second-quarter earnings call that ad load on its flagship platform has nearly reached saturation and will become less of a growth factor going forward. While Netflix maintains it can attract 60 million to 90 million U.S. subscribers, it's also showing signs of nearing saturation with over 47 million subscribers in the country.

Netflix is facing more challenges than Facebook: TV networks want more money for less content, and new streaming services are popping up every day, competing for viewers' attention. Facebook's biggest challenger might be Snapchat, but despite strong engagement growth from the app, the impact hasn't shown up in Facebook's numbers.

Netflix's expansion earlier this year to nearly every international market represents a huge growth opportunity. With just 36 million international subscribers, there's still plenty of room for Netflix to run. Netflix's international subscriber growth could accelerate going forward as it improves its content library in its relatively new markets. Facebook, comparatively, has already established itself in just about every market outside China -- where both companies are currently blocked.

Facebook has opportunities to grow revenue from Instagram and its ad network. Additionally, it plans to monetize Messenger and WhatsApp, which each have over 1 billion users. Unlocking value from those audiences could be another revenue driver for Facebook in the future.

To sum up, Facebook's historic revenue growth and its future opportunities make it a more compelling growth story than Netflix. Trading at a more "reasonable" valuation of 59.2 times earnings compared with Netflix's 285.2 multiple, it looks like the better buy for growth investors.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinals mania ... Follow @admlvy